Paul Ryan’s road to serfdom

September 15, 2010

Rising star Paul Ryan co-wrote an article the other day in the Wall Street Journal setting out his view on the critical choices we must make on the future direction of our society. He frames it as one “between free markets and managed capitalism; between limited government and an ever-expanding state; between rewarding entrepreneurs and equalizing economic rewards”. Do we prefer “a free enterprise society with a solid but limited safety net, or a cradle-to-grave, redistributive welfare state”? The authors are of course arguing for the former and warn, a la Friedrich Hayek, that the later is a ‘road to serfdom’. We must “stand up for America’s enduring principles of freedom and entrepreneurship”.

This is not at all original. Beyond Hayek, the same argument can be seen dating back to the early 19th century and even before. It’s a useful way of framing the issue and it sways a lot of people. But it’s a deeply flawed and obnoxious vision for those who truly oppose serfdom and favor democracy. Like the tea baggers, Ryan idealizes a pre-industrial Adam Smithian world of the 18th century that is not at all applicable to today.

Ryan says he favors ‘free markets’ but somehow ignores the reality that the global system is not remotely ‘free’. Virtually every industry in the world is an oligopoly consisting of just a few massive multinational corporations having near monopoly pricing power. Ongoing globalization will undoubtedly magnify this trend due to economies of scale and the drive of each corporation to maximize power. We don’t have an economic ‘free market’ – it’s a controlled market. Any move toward ‘freedom’ as it regards markets would require a radical break up of entire industries, an action that would seem impossible with Ryanian limited government. When it comes to markets, Ryan doesn’t favor freedom, he favors the status quo concentration of power.

Ryan’s list of ideals also includes the rewarding of entrepreneurs. Most innovations in the past decades, though, seem to have originated from employees working at firms, government agencies, and universities who were not obviously motivated by profit. Small businesses can provide important technological breakthroughs but it doesn’t require a Ryanian system to encourage them.

Ryan poses the alternative to his free market, entrepreneurial friendly society of freedom as one of an “ever expanding state” that “equalizes economic rewards”, “a cradle-to-grave redistributive welfare state”. This is a straw man argument. An ever expanding state is not the necessary alternative to Ryan’s vision of freedom. Ryan’s vision, in fact, is pure Darwinism in which the powerful and connected rule. It’s the opposite of true freedom. The society Ryan favors is one that concentrates financial wealth in the hands of the very few and requires the overwhelming majority to work for them with limited rights and virtually no security. The great majority would in fact be serf-like and Ryan’s vision should be seen as the most likely road to serfdom.

Ryan’s society isn’t one in which small businesses can thrive; it’s one that’s controlled by massively consolidated capital. The odds of succeeding as a small business have probably never been worse given the ever rising domination of big business. The possibility, however remote, of making a fortune is not a needed pre-condition to encourage small business or entrepreneurship. Why not vastly expand funds for small businesses, controlled democratically at the local level, so that anyone who wished to start one could have the financial capacity to do so? Rewards would not have to be high if the risks were much lower. Beyond this, though, the reality of ever expanding technology and productivity is that there is an ever reducing need for labor. ‘Redistribution’ will be necessary if we want technology to serve society without causing ever declining living standards. To use the term ‘redistribution’ implies an acceptance of market determined distribution as somehow fair, just, and efficient, a value judgment that seems very hard to sustain. An expanded state isn’t required – it could be handled through the tax code. Democratization of monetary policy would be an excellent first step.

An alternative to Ryan’s vision of an intensified status quo would be one of intensified democracy. A powerful state has never been the friend of democracy and it needs to be opposed to the same degree as Ryan’s concentrated wealth. The answer to Ryan is not an ‘ever-expanding state’ but an ever-expanding democracy that fights power concentrations wherever they may be.

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While some of your points are not clear IMHO, you correctly highlight the dichotomy we face with ever expanding corporations which become both too big to fail and so big that even governments can’t reign them in if common sense has gone out the window. This concern, however, also applies to government and its intrusion into the economic fibre of the country.

As an entrepreneur writing to a retired banker, I am surprised that you now promote debt, . . . of any kind. That is exactly the perception which has brought America, and much of the developed world, to the current state of affairs. America is obviously unique given the dollar’s position in international trade, nevertheless, monetization of the ballooning debt over the next 20 years will have dramatic negative consequences, simply because of the sheer size of it.

Sorry if I wasn’t clear in some of my points. I’m not a fan of a big state per my last paragraph. But I don’t agree with your implication that government (i.e. society) has no right to ‘intrude’ on the economy. The vast majority of citizens, after all, are employees and their sole means of existence is dependent on the economy. If assuring the maintenance of a reasonable standard of living isn’t an appropriate political topic, I don’t know what would be. So I think society has every reason to ‘intrude’ on the economy if it’s not seen as working for them.

I try to keep it quiet that I’m an ex-banker. But, hey, without debt what would a banker be?

I’ve written quite a bit about public debt under the monetary / fiscal tab. There’s very sound support for the concept that public debt is not at all like private and is really just a monetary item.

The problem IMHO with your view is that society will be stuck in almost continuous recessions and high unemployment if private debt doesn’t expand and we prohibit the state from spending. We can see this throughout history – the only times of low unemployment were when private debt expanded greatly – i.e. private printing of money via bank credit.

I think it comes down to a value choice: 1) we limit debt and public spending and accept ongoing recessions, under utilization of our technological capacity, and unemployment; or 2) we try to step outside the box and see that we have massive technological capacity to achieve a better world and that our views on purchasing power is what is holding us back. The key point – we should expand purchasing power to the extent of capacity. Inflation should be controllable as long as we limit spending to capacity. As an entrepreneur, such a program should be highly beneficial since higher purchasing power = more sales. A depressed economy does not help the small businessman.

Indeed. @James: “Monetization of debt” is nothing to fear the way it is often understood because it is impossible, because money is debt. It’s like saying monetization of money, or debtization of debt. It usually means the state exchanging one kind of government-created IOU – currency – or equivalently, government checks – for another – bonds, equivalently post-dated government checks. Its effects are obscure, little studied by the tiny minority of competent economists, and could be deflationary or inflationary. Whatever they are, they are minor and negligible, especially in low interest rate times, and major governments like the USA, the UK, Japan or Australia have effectively “monetized debt” with no perceptible bad effect, achieving the desired effect of interest rate control. The real economic effect of the creation of interest bearing government debt along with spending occurs at the time of the spending, not afterwards, when the government does or does not purchase its own interest bearing debt.

And of course the problem with Obama is that he is spending far too timidly to lower unemployment and create a robust economy. Government debt can never be a problem to a country with our kind of currency system. People selling scare stories about government debt are either lying or have no idea what they are talking about.

The U.S. is in a very unique position given its currency is the also the world’s trading currency. This provides options not available to other countries. . . . Granted.

However, money is created through debt, and monetization of that debt means printing more paper to be “lent” carrying positive interest. What the world, not just the U.S., now faces is the size of the balloon that the next 10-15 years will add onto that debt, as the U.S. finances the current demands plus the committed expectations of Baby Boomers.

Interest rates will be somewhat relevant, but the massive printing of dollars will have an impact which no one can predict with certainty since there are significant players in the game such as China, Japan and Europe who all have a critical say in the rules to followed. Past monetization of debt you refer to, are insignificant when compared to what is awaiting the U.S. taxpayer in the near term. I wonder if you have considered the outcome of implementing your theory, extrapolated through the coming 20 year period.

Terms like “easing” are useful to allay fears, but the 10-15 year prognosis is not positive, and government taking an ever more influential position in the economic health of the country is disruptive. The government cannot create the jobs that will bring prosperity back. Small to mid sized companies will do that if the government gets out of the way.

That means, for example, reversing the kinds of bureaucratic intrusions and obstructions that have made doing business in California so impossible.

James, I was saying I disagree with most of your assertions, as they are based on mainstream theories of money I believe are quite false, and get absolutely everything wrong. Jim & I have studied & believe in Modern Monetary Theory / (Neo)Chartalism / Functional Finance.

The US is not in such a unique position with respect to money. Any other country has the same options and should follow the same policy. The difference is that because the demand for US $ is so great, the US can run trade deficits with everyone else and reap stupendous benefits from them, especially if it creates enough money to fight their deflationary effects. Higher deficit spending now would benefit everyone, but the US more than most.

The MMT view is that money is not created through debt – by which I think you mean the government trading bonds it issues for private dollars. Money is created by spending and destroyed by taxing. The bond “debt” issuance is just a silly sideshow with comparatively little real meaning.

The Japanese debt monetization of the past decades – as I said, the phrase is based on conceptual confusion – is comparable to the one the US might want to do, and the US WWII debt monetization might have been larger – have to check. Neither had any real effect and are nothing to fear.

The US could buy up all the outstanding debt with dollars it creates out of thin air – it could even do so under current law – and reduce the US national debt to zero immediately, and have zero interest to pay- i.e. in common parlance, monetize 100% of the national debt. (Japan has “monetized” 50% of its) And this would not be particularly inflationary; it could even be deflationary. It’s tough to predict, but the reason it is not studied much is because it is clear the effect would be small.

China, Japan and Europe have NO say in what the US does internally. (We had no say in what the Japanese did) They might be surprised, but an immediate burst of prosperity in the US would ally any fears.

Any state can and should (and have in the past, although this has been forgotten) immediately create full employment by giving a government job to anyone who wants one. There is an enormous amount of useful work to do which is not being done now. And a key point is that this is not inflationary, but deflationary.

The thing is that the private sector is currently demanding, is starved for dollars, and the government is taxing far too many of them out of existence. That is the only way the government should really get out of the way. E.g. Just abolish social security taxation, but pay the benefits. Otherwise there are a lot of public purposes that money could be spent on.

Yes, I agree that all this might sound too crazily good to be true. But these guys start from really basic principles, proceed by tiny baby steps in their arguments and make everything watertight. The mainstream understanding of finance is comparatively shoddy, filled with handwaving and misplacing of trillions of dollars in its thinking. I’m a mathematician and have been told by very famous ones I have a particular talent for spotting holes in proofs. There aren’t any here.